Ebola: Trading Fear

This article is not about the medical details of Ebola, but rather a commentary on how assessing the impact of such a fear based news event can breed opportunity.

Here are my thoughts on the matter for what it’s worth:

On Sunday I pushed out a tweet after concern and, in some cases, outright panic about Ebola started to be felt on twitter following the news that a health care worker in Texas contracted the disease as a result of caring for victim Thomas Duncan.

As you can see from the RTs and likes it was a quite popular tweet, but also controversial to say the least. Let me be clear I have zero problem when people disagree with me, but leave it to twitter to be called names right away lol. From some of the responses it was clear it is certainly a very emotional issue.

Now none of us are experts on Ebola. Only very few people are, but it’s fair to say that Ebola is a horrific disease with no cure and a very high fatality rate. The stuff of CDC nightmares. Throughout history humanity has endured multiple global diseases that have wrecked havoc on ancient civilizations. Bubonic plague comes to mind, or of course the Spanish flu from 1918 that killed 50-100 million people worldwide.

Now that the world population had grown to over 7 billion people a new global killer could destroy civilization as we know it. I get it. It is a reality that the potential for such a virus exists.

Ebola is not that. Not anywhere close. It is true that the current outbreak dwarfs all previous ones. Over the last few decades there have been just a few handful of outbreaks which were usually geographically limited and the number of victims usually maxed out in the hundreds.

What scares people about this outbreak is that there are now over 4,000 fatalities and it is geographically much more widespread. Now that a couple of cases have appeared in Spain, the US and now Germany and all of a sudden it has become a major headline issue with false alarms making headlines.

And this is the moment where imaginations can run wild. What if it’s airborne? What if this or that can happen? What ends up happening is that people want to project what could be possible as opposed what is actually happening. Situations like this tend to create a major perception gap.

And this perception gap can create opportunity.

In situations like this the human brain starts associating price action with news. In other words we become followers and victim of crowd think. Ebola is in the news and stocks are sinking hence there is panic and I must sell too. This is often the same psychology with war for example.

Yet here are the facts. When the 2004 earthquake related tsunami killed 230,000 people overnight did it crash global stock markets? Nope it didn’t. Again we live on a planet with 7 billion people over 200,000 of which die every single day. In fact over 55,000,000 people die each year. It’s tragic, but it is part of our human reality. And, as I mentioned in the tweet above, 250,000 – 500,000 die of the flu each year.

For Ebola to just reach the average human daily death toll it would need to kill over 200,000 people. And even if it did, which would be horrible, it would stop eventually. It always has and will this time again. It is a matter of time and dependent on the speed and effectiveness of containment policies.

The point of this mental exercise is to simply ascertain that in its current form, while tragic, the death toll is small in the grand scheme of things and even a death toll tenfold the current number would simply not even approach recent larger disasters.

Now on the psychology front fear can create changes in behavior. Quarantines, canceled flights, etc. and this may have an impact on economic activity.

But since when has this market bothered about economic news? The fact is much of the price action is technically driven and heavily influenced by the liquidity flows.

Now you can blame Ebola of course, but reality is markets seek equilibrium even when they can dislocate greatly from long term moving averages as we have seen with this massive liquidity driven rally.

News driven events such as ebola or war become the excuse, but not the cause. And hence they are often mistaken for the latter.

Now could Ebola turn into something really bad that will kill 20-50% of the human race? Maybe, though I have seen no data to support such a notion. And if it did the value of your portfolio would likely be the least of your problems.

As it is we can only trade what is and not what might be. And what is at the moment is a market that is in its 4th week of a decline with a $NYSI reading of over -543 and a move into the 5 year trend line:

But this is not the only trend line of importance. The $VXO also hit a key trend line yesterday creating large confluence with the above mentioned $SPX trend line and is, to boot, seemingly repeating a structure from 2007:

What about Ebola? I don’t know, but Nigeria seems to have the recipe on how to contain it: Here’s how Nigeria beat Ebola. Hopefully the information will help other countries in getting this horrid outbreak under control as soon as possible.

As traders we certainly should pay attention to news, but analyze it in context of where markets are. More often than not, this can help us gain a tradable edge while hopefully keeping our sense of humor along the way: